The move - the first concrete illustration of Monti's 'zero-tolerance' approach towards state aids - would force governments to account for all state guarantees they grant to borrowers or lenders.

This is widely seen as an attack on Germany's cosseted state-owned regional banking sector, which benefits hugely from virtually unlimited guarantees from the local Länder.

Critics claim German banks such as Westdeutsche Landesbank have used such guarantees to get triple-A credit ratings, giving them access to cheaper finance on capital markets than some private-sector rivals and allowing them to make cheaper loans to customers.

The new approach outlined in Monti's paper would explicitly bring these guarantees within the scope of the EU's tough state aid regime. The report warns that guarantees to credit institutions are "capable of favouring the lender and distorting competition" and could, in future, fall foul of state aid rules. Guarantees which allow borrowers to secure loans on terms which they would not receive under normal market conditions could also be hit.

If these were found to be illegal, beneficiaries would have to repay the extra interest plus any other 'risk premiums' they would have been charged on the open market in the absence of such guarantees.

EU diplomats say the Commission has weathered a mild storm of protest from Germany and Austria, where state guarantees to the banking sector are most prevalent. They believe Berlin and Vienna now accept that reforms are needed. "There were the predictable political complaints from the German and Austrian Commissioners' cabinets but they did not get anything changed," said one.